South African auditors under siege

When IAB last reported on South Africa in 2022, local auditors felt frustrated and undermined by the Independent Regulatory Board for Auditors (IRBA). The Auditing Profession Amendment Act gave the impression auditors provide absolute, rather than reasonable, assurances, which auditors said was impossible.  This has led to resentment amongst auditors who felt the IRBA was just trying to catch them out on shoddy work, rather than support them to improve. It seems the conflict has not been resolved. According to a few firms that IAB talked to, it has become worse.

“The IRBA continues to be perceived as aggressive and unilateral in its decision making,” said Kariem Hoosain, partner at Mazars South Africa. “Representations made by firms appear to be ignored and the IRBA appear to rely on its regulatory authority to impose its decisions on firms.” 

“A group of auditors from a region of South Africa brought a matter against IRBA, asking to reverse the decision that made Mandatory Audit Firm Rotation Rule compulsory for public companies,” said Suresh Naidoo, director at Accenis, a PrimeGlobal firm. “The Supreme Court of Appeal dismissed compulsory MAFRR. IRBA has responded by stating that if independence rules are applied, in the spirit that it was intended, then MAFRR will still be a reality. IRBA has not indicated at the time of writing as to whether it would take the matter further i.e., to the Constitutional Court. Given the number of scandals in South Africa, I support MAFRR. The group bringing the action is not an official group of the member body SAICA even though they are members of SAICA. The impact of this judgment in the short term is expected to be relatively minimal, given that many public interest entities would have already taken steps to comply with the MAFRR in advance of 1 April 2023.”

MAFFR was meant to bolster confidence in South African auditing after a number of scandals rocked the industry. It would have meant that an audit firm, including a network firm as defined in the IRBA Code of Professional Conduct for Registered Auditors, shall not serve as the appointed auditor of a public interest entity for more than 10 consecutive financial years and the audit firm will only be eligible for reappointment as the auditor after the expiry of at least 5 financial years. 

In defence of the IRBA, Heinrich Moller, managing partner of South Africa, Kreston Global, pointed out that over the years, the IRBA has implemented several initiatives to strengthen its relationship with auditors. This includes providing guidance and support to auditors, conducting outreach programmes, and facilitating ongoing professional development. “That said, auditors feel that IRBA acts as a watchdog, and stringent reviews on compliance make it challenging to keep auditors in the profession and to run a profitable business,” he said.

The IRBA wants to be a watchdog with a harsh bite and has made a submission to National Treasury to amend the maximum fines it is able to impose on auditors and audit firms by between 25 and 125 times. “This move, if approved will, in my view, prove to be catastrophic to a profession facing a myriad of challenges,” said Bashier Adam, managing director of Nexia SAB&T. “Not least that of talent attraction and retention. It is likely that many firms will be negatively impacted by the move, which will only add to the woes of the profession.”

Customer demand has witnessed an upswing in South Africa, partly attributed to a recent decrease in the number of auditors and chartered accountants within the country. “Fee pressure is a prevalent concern in the accounting industry in South Africa,” said Moller. “Market competition has driven clients, particularly those from SMEs, to seek more cost-effective solutions and negotiate fees with accounting firms. This pressure on fees has necessitated careful cost management and the development of strategies to deliver value-added services efficiently while safeguarding profit margins.”

Staff recruitment and retention is also proving difficult. “The country faces a growing need for skilled accounting professionals, especially in specialised domains like forensic accounting, tax consulting, and audit services,” said Moller. “Fierce competition exists among accounting firms and other industries to secure qualified accountants, particularly those possessing substantial experience or technical expertise. To attract and retain top talent, firms are compelled to offer competitive salaries and attractive benefits packages.”

“Industry-wide, a lot of multinational firms are outsourcing to their South African offices due to the low cost,” said Martin Niebuhr, senior director of Watson Incorporated, a Morison Global member firm. “Demand for quality employees exceeds supply. It is very difficult to attract and retain quality staff.”

Local firms are struggling to match the salaries being offering by international firms, according to Adam. “The Covid19 pandemic resulted in employees worldwide being exposed to working remotely, which has increased opportunities for South African talent to work remotely for international business and earning in foreign currency,” he said. Auditing is under particular pressure, as auditors are leaving the profession in high numbers, coupled with a declining number of entrants to the profession. “There is constant pressure from business and the public sector to reduce spend on advisory services, further impacting the deteriorating margins of the audit business,” he said. “The recently promulgated Employment Equity Act, which seeks to introduce employment varying quotas based on race in the nine provinces has not been well received, and meeting the requirements will create challenges which could lead a further lack of investment in people by business in general, including the audit firms.”

The Act aims to redress injustices of the past by implementing affirmative action measures. The purpose of the Act is to achieve equity in the workplace, by promoting equal opportunity and fair treatment in employment through the elimination of unfair discrimination and implementing affirmative action measures to redress the disadvantages in employment experienced by designated groups. Businesses across all sectors have pushed back against the Act, claiming it has arrived at a challenging time. One of the most controversial aspects of the new act is the sectorial targets set across 18 sectors. The government will have the authority to establish these targets over the next five years, which businesses and trade unions say will be impossible to meet due to skills shortages. Nevertheless, any businesses not meeting targets faces hefty fines.

The auditing sector in particular is facing increased regulation and uncertainty. “Regulations that came into force recently are ISA315 (Revised), ISQM 1 and new Anti-Money Laundering (AML) legislation applicable on certain services performed by auditors,” said Jacques Coetzee, director of Logista, a BKR partner. “But there is still uncertainty around exactly what services are in scope and we are still awaiting confirmation on this. Also, a whole new competency assessment programme for trainees was rolled out in 2022 resulting in much more partner and manager time in signing off on trainee competencies through-out the year.” There has been a significant cost increase in running an auditing practise, according to Coetzee, especially ensuring all regulatory requirements are met and having all relevant systems and procedures in place. “The fees however are still under pressure and the increase in cost cannot all be passed on to clients,” he said.

Going forward, Naidoo expects firms are likely to continue the trajectory of moving towards complete automation including increased use of Artificial intelligence. With it, comes a risk associated with cybercrime and the concomitant controls that need to be put in place. All firms have seen a rise in requests for help with SARS issues. There has been many challenges with the South African Revenue Services (SARS) whereby they are slow at making refunds, selecting many returns for verification or audit and effectively delaying processes significantly. Hoosain has seen transaction advisory, financial advisory, tax advisory and sustainability services grow and is expecting a growing demand for cyber security, sustainability services, and data analytics to improve audit efficiency.

The South African economy is under real pressure with high inflation and a weakening Rand. This will put more pressure on fees but will also increase the audit risk as it relates to going concern issues, according to Coetzee. But the country narrowly avoided recession when it recorded slight growth in the first quarter of 2023, according to data published this month by the national statistics agency, StatsSA. South Africa saw its GDP grow by 0.4% in the first three months of the year, following a decline of 1.1% in the last quarter of 2022, StatsSA said in a statement. Growth exceeded analysts' expectations, despite the power cuts that continue to continue to plague the country.  The electricity crisis in South Africa has deepened since last year, with scheduled load shedding lasting up to 12 hours a day. Power outages are expected to reach a record 207 days in 2022, compared with 75 days in 2021. According to estimates by the Minister of Energy, they cost South Africa more than USD 50 million a day in lost production.